ONE Group Hospitality, Inc. quarterly report, Q3 FY2023

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Business context and reporting period

The ONE Group Hospitality, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2023. It develops, owns, operates, manages and licenses restaurants and food-and-beverage venues, primarily STK and Kona Grill. At quarter-end it reported 64 venues: 25 STKs, 26 Kona Grills and 13 other food-and-beverage venues. The company reported 64 venues again as of October 31, with 27 Kona Grills and 12 other food-and-beverage venues.

Unless noted otherwise, financial amounts below are in millions of dollars. Comparisons are with the corresponding 2022 period.

Financial performance, cash flow and liquidity

  • Third-quarter revenue: $76.9 million, up 5.3%. Owned restaurant revenue was $73.7 million; management, license and incentive fees were $3.2 million, down 8.6%.
  • Third-quarter earnings: Operating loss was $2.0 million versus operating income of $0.5 million. Net loss attributable to the company was $3.1 million, or $0.10 per diluted share, versus net income of $0.5 million, or $0.01 per diluted share.
  • Third-quarter restaurant economics: Restaurant Operating Profit, a company-defined non-GAAP measure, was $9.1 million, essentially unchanged; its margin on owned restaurant revenue declined to 12.3% from 13.1%. Same-store sales declined 3.0% overall: STK declined 5.5%, while Kona Grill grew 1.1%.
  • Nine-month results: Revenue was $242.8 million, up 6.4%. Operating income fell to $4.4 million from $10.4 million. Consolidated net loss was $0.5 million versus net income of $8.3 million; net income attributable to the company was $0.08 million versus $8.5 million. Restaurant Operating Profit was $33.9 million versus $34.9 million, with margin down to 14.6% from 16.1%.
  • Costs and margins: Third-quarter owned restaurant operating expenses rose to 62.9% of owned restaurant revenue from 62.0%; general and administrative expense rose to 9.5% of total revenue from 8.8%. Cost of sales improved slightly to 24.7% from 24.9%. For the nine months, cost of sales improved to 24.2% from 25.5%, but restaurant operating expenses increased to 61.1% from 58.4% of owned restaurant revenue.
  • Adjusted EBITDA: Company-defined Adjusted EBITDA attributable to The ONE Group was $6.2 million for Q3 versus $7.1 million, and $25.6 million for the first nine months versus $28.2 million. These non-GAAP measures are not substitutes for GAAP results and may not be comparable across companies.
  • Cash flow and investment: Nine-month operating cash flow was $15.2 million versus $16.3 million. Capital expenditures were $38.4 million versus $21.3 million, primarily for new venues; financing cash outflow was $9.7 million, including $7.7 million of share repurchases. Cash declined $33.0 million to $22.1 million.
  • Debt and liquidity at September 30: Gross long-term borrowings were $74.0 million, including $50.0 million drawn on the delayed-draw term facility; the balance-sheet carrying amount, net of issuance costs and current portion, was $70.9 million. The weighted-average borrowing rate was 12.40%, versus 10.31% at December 2022. Revolver availability was $10.6 million, subject to conditions; $1.4 million of standby letters of credit were outstanding. The company reported covenant compliance. Current assets were $42.0 million and current liabilities $45.5 million.
  • Lease obligations: Operating lease liabilities totaled $122.6 million, including $6.6 million current; operating lease expense for the first nine months was $12.1 million, with total lease cost of $21.6 million.

Material changes versus the prior comparable period

  • Revenue growth reflected recently opened venues, while same-store sales weakened. For the first nine months, comparable restaurant sales decreased 2.1%.
  • Profitability was pressured by wage inflation, growth-related staffing investments, marketing and general operating cost inflation, higher depreciation, and increased pre-opening expenses. Q3 pre-opening expense rose to $3.1 million from $2.7 million; nine-month expense rose to $6.0 million from $3.8 million.
  • Interest expense increased to $1.7 million in Q3 from $0.4 million and to $5.1 million for the first nine months from $1.4 million, following the $50.0 million delayed-draw borrowing and higher rates.
  • Capital spending increased substantially, while cash declined. The company repurchased $7.7 million of stock during the first nine months; the $15.0 million repurchase program was completed in October 2023.
  • Management, license and incentive fee revenue declined, primarily because the Radio management agreement at ME London was not renewed.

Outlook, commentary and risks

  • Management said it expected to fund operations and planned restaurant openings for at least the next 12 months from operating cash flow and landlord construction allowances, with the revolver or equity issuance as possible additional sources. This expectation is subject to operating performance.
  • The company intended to open eight venues in 2023 and reported six opened by the filing’s discussion, including two licensed Bao Yum venues. Four company-owned restaurants had opened in the first ten months; management expected another three to five company-owned openings over the following six months. Three company-owned STKs were under construction at quarter-end.
  • Management said Q3 is typically its lowest-revenue quarter. It described initiatives to improve purchasing efficiency, scheduling productivity and vendor and travel costs. New openings, construction costs, staffing and landlord contributions remain important execution and funding variables.
  • Management cited risks including economic and competitive conditions, labor and supply availability, execution and timing of openings, construction and permitting delays, regulations, and the ability to improve operating performance. The company has significant long-term lease commitments and floating-rate debt exposure.
  • The company was party to ordinary-course claims, including lease disputes and employee-related matters. Management did not expect current matters to have a material adverse effect, while noting litigation outcomes are uncertain. It reported no material changes to the risk factors in its 2022 Form 10-K.
  • The projected 2023 annual effective tax rate was approximately 5.0%; the filing attributes the difference from the statutory rate principally to tip-related tax credits and other jurisdictional and compensation items. No numerical full-year revenue or earnings guidance is provided in the filing text.

Important facts for investors to verify

  1. Whether same-store sales and restaurant-level margins stabilize, particularly at STK, and whether cost-control measures offset labor and operating-cost inflation.
  2. Opening schedules, total development spending, landlord contribution receipts and the cash required to complete planned venues.
  3. Cash generation and liquidity after capital expenditures, repurchases and lease payments; confirm current revolver availability and covenant headroom.
  4. Debt costs and sensitivity to interest rates, including the reported 12.40% weighted-average rate and the company’s ability to service debt alongside lease obligations.
  5. Progress and potential financial impact of employee-related, lease and other legal claims; the filing does not quantify potential exposure beyond recorded accruals.